The hryvnia was one of the world’s best performing currencies in 2019 as foreign investors rushed to buy up hryvnia bonds in record amounts over the summer.
Experts say this rush can help Ukraine pay off its debts this year — the country’s debt repayment burden hits its peak in 2019-2022. It also allowed the National Bank of Ukraine, or NBU, to replenish the country’s international reserves.
“The key positive implications of foreign inflows is that they help with large debt repayments and financing budget deficit, while improving the currency structure of Ukraine’s public debt,” said Olena Bilan, an economist with investment firm Dragon Capital.
Still, the “instability of these inflows is the major negative, in my view,” she added. “Inflows are coming from portfolio investors and there is a risk of a sudden stop.”
Analysts said that a majority of investments into hryvnia bonds were driven by speculation by portfolio investors. This is not the foreign investment that Ukraine desperately needs.
“This is not the money that makes the economy, this is not the money that influences GDP,” said Ruslan Cherniy, the chief editor of Financial Club, an online news outlet focused on banking. “This is for fixing holes in the budget.”
Despite the investments’ potential to top up the budget, an overvalued hryvnia can also widen deficits. When the hryvnia value is higher than what had been planned in the state budget, Ukraine collects less customs and value-added tax on imports, according to Oleksandr Paraschiy, a financial analyst with Concorde Capital.
It’s unknown how long the demand will continue. But the Ministry of Finance has already shown its intention to put up less instruments for auction in the future.
According to the Ministry of Finance, the strong investment in hryvnia bonds is allowing it to fulfill Ukraine’s borrowing plan for the year ahead of schedule. It can now restrict the volume of all government bond issues and try to concentrate demand for instruments with longer maturity. Analysts also expect that the ministry will move to further decrease yields.
According to Reuters, the hryvnia value grew 9 percent in the first seven months of 2019. At the end of July, the exchange rate dipped just under 25 hryvnia per dollar, which had not happened since 2016. The hryvnia had since retreated above 25.40 per dollar.
The hryvnia fluctuates with the seasons. In the fall, Ukraine imports energy and farmers need fuel to harvest crops. As the end of the year nears, the government plans its largest expenses. All this causes the hryvnia’s value to fall. In the spring farmers get revenues, boosting the currency. The hryvnia is also buoyed by remittances from Ukrainians working abroad.
However, at the end of May, the country linked up with international securities depository Clearstream, which greatly simplified the ability of investors to buy Ukrainian bonds.
Since the start of 2019, nonresident investors increased their share of Ukrainian government debt about thirteen-fold, from Hr 6.3 billion to Hr 87 billion. At a July 30 auction, the government sold a record amount of debt, over Hr 17 billion, most of which, over Hr 12 billion, went to foreign investors.
Even before Clearstream opened the gate, record low yields across the global bond market, had investors scrambling for an emerging market with high yields.
Marton Huebler, an emerging markets portfolio manager at Fidelity International, which bought Ukrainian bonds at the end of 2018, said that the main draw of Ukraine’s government debt is its “very elevated real yield,” due to Ukraine’s very high interest rates and 9 percent inflation. Investors also like the steady hands on the reins of Ukraine’s economy
“The Ministry of Finance is doing a good job in improving the management of domestic debt and issuance,” wrote Timothy Ash, the emerging markets strategist at Bluebay Asset Management. He added that investors have “confidence in the exchange rate and monetary policies of the NBU. The institution is seen as very credible in management of policy.”
Ukraine’s presidential and parliamentary elections also drove interest. After the elections concluded, international investors became more confident about the new administration’s promises to continue to implement market reforms and working with the International Monetary Fund.
Multiple analysts expect the hryvnia to slide down in value over the next few months. According to a Reuters poll, analysts expect the exchange rate to average at Hr 27 against one dollar in three months and at Hr 27.9 in six months, due to a drop in foreign money inflows and a wide trade deficit.
When this slide happens, some expect international investors to begin losing their appetite.
While it’s hard to tell how long the interest will endure, some analysts said they noticed more investors buying bonds with maturities from two to up to five and a half years, compared to short term bonds with maturities of under one year.
“So it’s possible that many aren’t trying to turn a quick speculative profit but are here for longer,” said Paraschiy. “But it is hard to say.”
